Court’s pricing decision shows good judgement

July 5, 2007

Editorial

It might not sit well with Wal-Mart, Costco and some Internet retailers. But the Supreme Court’s decision last week to reverse a 1911 precedent and allow what is called minimum retail pricing or vertical pricing — or at least not to conclude automatically that such schemes violate antitrust laws — was a welcome sign of growing economic literacy.

Minimum retail pricing is when a manufacturer tells retailers they may not sell a product for any less than a specified price. It is mostly applied to high-end items, to products that might require special training or special service to sell properly, or to new products that require some introduction before consumers are persuaded to buy them.

In 1911 the Supreme Court, in the Dr. Miles case, declared such agreements an automatic or per se violation of antitrust laws. Some companies, however, have tried to keep such agreements in force informally, by refusing to sell again to stores that discount their products.

That’s what happened in the case of Leegin Creative Leather Products v. PSKS Inc. Leegin made high-end leather products under the Brighton label and required retailers not to discount them because, it argued, selling took special services, and it wanted to be sure retailers had sufficient margin to keep stocking their products. A store in Texas decided to discount the merchandise and Leegin refused to sell again to the discounter. The discounter sued and won. The Supreme Court reversed the decision.

Recent economic research has suggested strongly that minimum pricing does not always work to hurt consumers and that forbidding it may actually reduce competition.

The classic example is the customer who goes into a high-end specialty store to test out, for example, a new golf club, gets the full story including instruction from a specialized sales person or golf pro, then goes to the Internet to buy it at a discount. When that happens the incentive to produce such items is reduced substantially, and the incentive to maintain such high levels of customer service can disappear. Innovation can suffer.

The high court didn’t say that all minimum-pricing schemes will automatically be permitted from now on, but specified that future cases should be decided on the merits, on a case-by-case basis. That could create some confusion — courts are not always the best places to do sophisticated economic analysis — but this ruling will permit more flexibility in the marketplace than had been the case before. The
court was wise to reconsider even such a longstanding precedent.